GAO Seeks Suspension of High-Tech Export Program

Unable to determine the validity of users of a Department of Commerce program designed to facilitate technological exports to China, the U.S. Government Accountability Office calls for suspension of the program. The Department of Commerce, though, rejects GAO findings on the shipping of semiconductor equipment and materials to China.

The United States
should suspend an export program to China
involving semiconductors and materials because the Department of Commerce is
unable to ensure that the goods shipped are going to Validated End Users, according
to a report by the Government Accountability Office.
The report-roundly rejected by the Department of Commerce-found that the VEU
program is not verifying that chips and related semiconductor materials shipped
to China are
being used as intended. Since semiconductors have both civilian and military
applications, U.S.
export control policy treats semiconductor equipment and materials as "dual-use"
items and controls the export of these items through licensing requirements to
sensitive destinations such as China.

Most U.S.
exports of semiconductor equipment and materials to China
require an export license to legally sell or transfer items from a U.S.
firm to a specified user in China.
However, in June 2007 the Department of Commerce created the VEU program,
allowing U.S.
exporters to ship eligible products to certain prescreened Chinese entities,
including three companies authorized to receive semiconductor equipment and
materials without a license.

"The Department of Commerce anticipated that the VEU program would
facilitate trade to China and enhance U.S. security; however, challenges with
program implementation may limit Commerce's ability to ensure items are being
used as intended," the report stated.
Unlike licensed shipments, the VEU program does not require a post-shipment
verification check. VEUs agree to periodic records reviews and discretionary
on-site reviews by U.S.
government personnel. However, the GAO report noted, the Department of Commerce
has not reached an agreement with China
on conducting on-site reviews.
"The procedures for selecting which Validated End Users will receive
on-site reviews are still in draft form and have not been cleared by the
interagency process," the report said.
The Department Commerce countered that it can use a classified 2004
agreement with China
to conduct on-site reviews.
"The fundamental premise of the report-that no adequate mechanism
exists to provide oversight of exports of semiconductor equipment under the
Validated End User agreement-is incorrect," Commerce said in a reply
letter to the GAO findings. "The general procedures for selecting on-site
reviews have been established and guidance for specific on-site reviews must be
developed on a case-by-case to ensure the review is tailored to each VEU."
Since the GAO issued a 2002 report on China's
semiconductor manufacturing capabilities finding that the United
States held a considerable lead, China
has moved to the close the gap. According to the GAO, China
is now only one generation behind the United
States in producing state-of-the-art
semiconductors.
"China's most advanced semiconductor manufacturing companies
continue to rely on equipment and materials from the United States, Europe and Japan to improve their manufacturing capabilities,"
the report stated. "However, China has developed an indigenous capacity to build some
types of advanced semiconductor manufacturing equipment, which may soon provide
companies in China with a domestic source of equipment capable of
producing semiconductors that are close to state of the art."